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The arrival of Bitcoin futures marked the beginning of a new era for cryptocurrencies. Between December 11 and December 18, the CBOE and CME debuted their Bitcoin futures contracts, marking the beginning of a new price discovery phase for the nascent digital assets. A number of important observations have been made since futures trading came online.

In our Bitcoin futures market outlook, we suggested that, “As a result of the process of price discovery with the new futures contracts, the dampened volatility may ultimately provoke a positive feedback loop that sees confidence in Bitcoin’s stability grow. In turn, this should result in greater institutional flows into the cryptocurrency space.”

Indeed, DailyFX’s ultimate parent company, IG Group, has jumped into the futures market head first to hedge off its risk exposure to Bitcoin trading, accounting for 20% of all open interest. IG Group may be one of the first major brokerages to hedge its risk in said manner, but it certainly won’t be the last, particularly as capital flows into the cryptocurrency space continue to grow.

So while the cryptocurrency market is indeed maturing properly with institutional players getting involved, there have been other developments that have been worrying. To no surprise, the fervor over cryptocurrency trading has attracted a great deal of government scrutiny from all corners of the globe. It can’t be dismissed that Bitcoin’s price peaked the day that the CME futures started trading, which just so happened to be the same time the Chinese government announced it was clamping down on mining operations in the country.

Even in the past 24-hours there have been worrying developments, as my colleague Nick Cawley pointed out this morning. To wit, “The South Korean Fin Min said on a radio interview today that the shutdown of virtual currency exchanges ‘is still an option’ and while negative it adds little to Monday’s news that before South Korean authorities make a decision, they said they would need “sufficient consultation and coordination of options…According to unconfirmed reports, China is looking to ban companies offering market making, settlement and clearing services for centralized trading.”

Given the news out of Asia in recent weeks, it would seem that scenario two is winning out. The threat of a ban in trading in cryptocurrency markets in China and South Korea poses a legitimate, almost existential risk to Bitcoin in the short-term as aggregate demand would take an enormous hit: depending upon the metric used, estimates point to China, Japan, and South Korea as accounting for up to 60% of global trading volume in Bitcoin in 2017.

Chart 2: Bitcoin (BTCUSD) Daily Timeframe (May 2017 to January 2018)

All of which begs the question: if Bitcoin has really been in a bubble that is now due to deflate thanks to a government-induced drawdown in aggregate demand – which the closing of exchanges would effectively be – how mature is this bubble? Chart 2 above, when compared to chart 3 below, speaks for itself: if this is a bubble, we’re now entering the “fear” stage.

Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. Forex trading involves risk. Losses can exceed deposits. We recommend that you seek independent advice and ensure you fully understand the risks involved before trading.

FX Publications Inc (dba DailyFX) is registered with the Commodities Futures Trading Commission as a Guaranteed Introducing Broker and is a member of the National Futures Association (ID# 0517400). Registered Address: 32 Old Slip, Suite 803; New York, NY 10005. FX Publications Inc is a subsidiary of IG US Holdings, Inc (a company registered in Delaware under number 4456365)